Cost Estimating

Many real-world projects end up running on tight budgets or even lacking necessary resources to complete the project without compromising the project execution. The work breakdown structure (WBS) is essential not only for task duration estimating but also for developing accurate resource and cost estimates. The most accurate technique used for cost estimating is called Bottom-up Estimating but it also takes the most time and effort to complete. This technique requires estimating the cost of individual tasks or work packages at the lowest level of detail. These cost estimates are added up or “rolled up” to higher levels of the WBS until the cost estimate for the entire project is determined. However, the common problem associated with the bottom-up estimating is that early in the project a lot of detailed project information is simply not available. Recognizing that it may not be always feasible to provide cost estimates for the entire project early in the planning process, the cost estimates are often provided only for one project phase at a time. Alternatively, the project manager can use less demanding Analogous Estimating or Top-Down Estimating technique. To estimate the cost of the project, analogous estimating technique involves using expert judgment and historical information on the actual costs of similar, previously completed projects. A variety of additional data sources can be used for cost estimating and budgeting process including the costs of internal and external labour, materials, equipment, training, licensing, travel, etc. The project cost estimates should also include contingency reserves to account for specific known project risks and/or additional reserves to account for the unknown risks. Cost estimating is certainly one of the hardest aspects of project planning processes because of a large number of factors that can affect accuracy of cost estimates.

Overestimating project costs and required resources could reverse the management decision to implement the project while underestimating project costs will likely result in cost overruns. It is clear that the project manager alone cannot develop reasonably accurate cost estimates. It takes cooperation and participation of all project stakeholders to minimize uncertainties and refine the numbers. All financial assumptions should be thoroughly documented for future reference. When approved by the project sponsor, the budget becomes the cost baseline that is used for monitoring and control of cost performance during the entire project.